The wild card in the current process is an iron ore tailings dam collapse at a Vale operation in Brazil last month, which will constrain short-term supply and put pressure on Vale’s existing supply over the next few months just as BlueScope heads toward the final stages of its negotiations.
Looking to cut costs
Bluescope, which is slated to release its half-year financial results on Monday, is also examining apotential $900 million-plus expansion of its North Star steel mill in Ohiowith a decision likely to be made soon on whether to proceed. The US operations have been a standout performer for the $6.5 billion manufacturer over the past few years because of strong demand from US industry and much lower energy costs than Australia and underline the company’s drive to maximise investment returns and drive costs lower.
BlueScope was spun out of BHP in 2002 and listed on the Australian Securities Exchange as a separate entity. To ensure security of iron ore supply it signed a long-term exclusive supply contract with BHP for the crucial steel-making raw material. That deal also extended to the transportation of iron ore, using the two vessels, MV Mariloula and MV Lowlands Brilliance, which are leased from shipping group Teekay Corporation.
BlueScope said it had been buying several shipments from various companies for trials at Port Kembla as part of its assessment of new iron ore supply. It wants to cut costs and ensure much more flexibility in its supply arrangements.
“We are now in active discussions with local and international iron ore suppliers, as we consider our future iron ore sourcing strategy,” BlueScope said in a statement on Friday.
“As part of that process, we have recently purchased a number of ‘trial’ shipments of iron ore from a range of suppliers.”
It declined to specify the companies involved. Vale along with big ASX-listed miners Rio Tinto and BHP are all jostling for the business. Iron ore prices have been robust over the past 12 months, rising by about 20 per cent in a volatile market.
The Vale tailings dam collapse has injected short-term volatility into the iron ore market.
Potential for price to climb
Mining and energy consultants Wood Mackenzie are predicting that iron prices would stay at about $US85 per tonne should Vale’s dam issues strip 50 million tonnes from their supply, but if there were 75 million tonnes coming out of the market in the short term the iron ore price might climb to $US100 million.
“Given no decision has yet been made on future sourcing, it is not appropriate to comment publicly during this stage of due diligence,” BlueScope said.
BlueScope has been a strong performer over the past few years after becoming a bigger global player through the well-timed North Star acquisition in the United States, where it has been investing more capital because of better returns and lower energy prices.
The North Star mill in Ohio is running at full capacity.The $US720 million ($956 million) acquisition of the 50 per cent stake in North Star that BlueScope did not own in 2015has proved to be a crucial factor in BlueScope’s revival.
BlueScope shares in mid-2015 were languishing at just above $3 and in a fortunate piece of timing, BlueScope moved to 100 per cent ownership of the remaining 50 per cent from Cargill in October 2015, just as demand and pricing in the US began to soar.
BlueScope shares soared to above $18 in mid-August last year, but have since come off to $12.30.
BHP also de-merged another steelmaking group in 2000, just before the BlueScope spin-off. That company was known as OneSteel before changing its name in 2012 to Arrium, which subsequently collapsed in 2016 under heavy debts. The Arrium operations, which include the Whyalla steelworks, were rescued byBritish billionaire Sanjeev Gupta’s GFG Alliance,which bought it for about $700 million from administrator KordaMentha. The Whyalla steelworks secures all of its iron ore from a nearby iron ore mine in the Middleback Ranges in northern South Australia, which is owned by the group.